Investment returns: running the numbers

As our financial awareness grew, we realized that using a 4% rule in stock market investing, we’d still be more than 65 before we were able to invest enough to retire. It was a discouraging and sobering realization. We’d done some investing in the past that had been poorly managed, but even as we began managing our own investments using vanguard index funds (unfortunately Joseph’s employers do not offer any matching funds towards retirement investments), we knew we had to take matters even more into our own hands if we ever hoped to have more time to spend together.

We jumped into real estate investing as a way we could actively manage our investments in a way we understood and get better returns than the stock market. We’ve been learning more and more, but it has definitely set us on a path to early retirement/rental management working for ourselves.

Our first property, we purchased based largely on location (close to our home) and the numbers weren’t excellent… but it was definitely a good way to get our feet wet. All we knew was the most basic way to calculate cap rate (capitalization rate), and a spreadsheet from our realtor about running numbers like purchase price, insurance, interest, and more.

we analyze every property and we learn from every property

Here’s how we run those numbers now (and below we share some of our real numbers!):

  • Some initial numbers needed:
    • Assessed value
    • Purchase price
    • Interest rate
    • Closing costs
    • Estimated rent ready/rehab costs
    • Mortgage payment (calculate using PMT function on excel or an online mortgage payment calculator)
  • Total cash invested = down payment + closing costs + rent ready/rehab costs (always try to overestimate this!)
  • Monthly Expenses:
    • Insurance cost
    • Property taxes (find out your county’s tax percentage in order to calculate using assessed value)
    • Trash/recycling
    • Water/sewer (if these fall under the landlord’s responsibility)
    • Repairs: we calculate 5% of monthly income
    • CapEx (Capital expense): we calculate another 5% of monthly income here
    • Property management fees – don’t forget to deduct these from income if you use a property management company (we do not at this time)
    • Vacancy: we calculate 9% monthly toward vacancy fund
  • Income (here’s the good part!):
    • Gross income: Rent (and additional fees, if any)
  • Net Operating Income and Cash Flow
    • NOI = Gross income – all monthly expenses
    • Cash flow: NOI – mortgage payments (principal and interest)
  • More important numbers/calculations:
    • Cap rate (capitalization rate) = annual net operating income/total cash in
    • Cash-on-cash return = annual cash flow/total cash invested

Every one of these calculations is on a spreadsheet we use–whenever we are evaluating a possible home purchase, we enter the variables and determine whether we’d have any possibility of the cap rate and cash-on-cash numbers we want to see in our investments. We’ve also lost count of the number of properties that we’ve made offers on but not bought when the price was negotiated too high.

Enough of the hypotheticals, here’s the numbers for our rentals:

  • Rental #1:
    • Rent $1,015
    • Total cash invested: $22,501
    • Monthly operating expenses: $394
    • Monthly mortgage payment: $389
    • Cap rate: 7.48%
    • Cash-on-cash return: 12.24%

As this was our first rental, we paid more than we would’ve liked, but were fortunate that the house boom hadn’t quite hit our area yet. The cap rate isn’t as good as we’d like, and the cash-on-cash return have improved as rental rates have risen slightly since our purchase of the property.

  • Rental #2:
    • Rent $1,045
    • Total cash invested: $28,514 (our down payment was lower, but rehab costs were higher than with rental #1, the biggest investment was time and energy on a massive rehab)
    • Monthly operating expenses: $352
    • Monthly mortgage payment: $306 (refinanced this only a year after purchasing for a better interest rate!)
    • Cap rate: 9.06%
    • Cash-on-cash return: 16.32%

These are closer to our ideal numbers! We hope that more of our rentals can reach this cap rate and cash-on-cash performance!

  • Rental #3 (our largest house and only 3 bedroom)
  • Rent $1,170
  • Total cash invested: $29,585
  • Monthly operating expenses: $446
  • Monthly mortgage payment: $374 (refinanced this after just a few months for a better interest rate!)
  • Cap rate: 7.84%
  • Cash-on-cash return: 14.02%

We didn’t achieve numbers like we hoped for based on rental #2, but this property involved less rehab than rental #2 and a larger loan (making for larger payments/lower cash flow). We hope to use our appraised value to lower the tax assessed value this summer. In lowering our taxes, we could improve some of our cash flow. We also rented this home out during the winter, so the rent we settled on was lower than we could’ve gotten at the peak seasons for moving. We wrote about some other things we learned with this property here.

We pinch pennies, save as much as we can of our income (and every bit of rental income), and then watch for the right deals. We have actually found all of these properties on the MLS and worked with a realtor on all of them.

If you’re thinking of getting into real estate, do you research, never compromise on your numbers or standards, but don’t be afraid to try it!

One comment

  1. The numbers on these rentals sure look fantastic. A far cry from where I’m from 🙂 Not a real estate guy myself but I’ll probably be doing some sort of house hacking once I settle down a bit. Not exactly real estate mogul but at least I’ll try to live for free.

    Thanks for sharing some of your thought process and numbers.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s